Ann Nicholson - Vice President, Investor Relations Wendell Weeks - Chairman and Chief Executive Officer Jim Flaws - Vice Chairman and Chief Financial Officer.

Rod Hall - JPMorgan Patrick Newton - Stifel Amitabh Passi - UBS Joseph Wolf - Barclays Ehud Gelblum - Citigroup Simona Jankowski - Goldman Sachs Steven Fox - Cross Research Brian White - Cantor Fitzgerald Wamsi Mohan - Bank of America.

Ladies and gentlemen, welcome to the Corning Incorporated Third Quarter 2014 Earnings Results. It is my pleasure to turn the call over to Ann Nicholson, Division Vice President of Investor Relations..

Thank you, Gray. Good morning. Welcome to Corning’s third quarter conference call. With me today is Wendell Weeks, Chairman and Chief Executive Officer, and Jim Flaws, Vice Chairman and Chief Financial Officer.

Before we begin our formal remarks, I would like to remind you that today’s remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These remarks involve a number of risks, uncertainties and other factors that could cause actual results to differ materially.

These factors are detailed in the company’s financial reports. You should also note that this presentation contains a number of non-GAAP measures. Reconciliation can be found on our website. Now, I will turn the call over to Jim..

Thanks, Ann. Good morning, everyone. I am pleased to share the details of our third quarter performance with you this morning. Corning had an outstanding quarter with EPS up 21% versus last year. This makes two full years of year-over-year quarterly earnings growth, a significant accomplishment. It’s a trend we are proud of and working to continue.

I would like to recap our 2014 areas of focus, which have been key to this success year-to-date.

They are number one to continue the positive momentum in Display Technologies, number two to integrate Corning Precision Materials and execute on the synergy plan, number three to grow sales and profits of our other segments, and number four to return cash to shareholders. We continue to advance on each one of these priorities.

In display, our LCD glass volume growth was excellent and our price declines continue to moderate. TV retail sales and screen size have been stronger than our forecast and we are increasing our view of glass demand for the year. Overall, this business has good momentum heading into quarter four and next year.

Our CPM integration is going well and we feel very good about getting $90 million or more in pre-tax synergies this year. In total, these first two priorities contributed about half of our quarter three year-over-year EPS improvement. The other half of our EPS improvement came from the latter two priorities.

In our other segments, we are seeing excellent growth in Environmental and Optical Communications, actually stronger than our expectations. Specialty Materials did meet the expectations we outlined in our July call and Dow Corning had an excellent quarter.

Finally, we are continuing the share repurchases and expect to complete our current program in quarter four. So, let’s get into third quarter highlights. In the third quarter, we had record core sales in gross margin, with Optical Communications and Display Technologies exceeding our expectations.

We delivered $0.40 of earnings per share that surpassed last year by $0.07. We realized increased synergies from the integration of CPM and we attained more moderate price declines for LCD glass. Let’s turn to the details.

Now as a reminder, we are providing core performance results in order to exclude non-performance related items and increase the transparency of our operating results. Core financial measures are non-GAAP, which we use in addition to GAAP.

You can find the detailed reconciliations on our website outlining the differences between these non-GAAP measures and the most directly comparable GAAP measure. Third quarter sales were $2.6 billion, up 26% versus last year and a new record driven largely by the consolidation of CPM sales.

We have successfully expanded our gross margin percent with Q3 being up 1.5 points driven by the improved profitability in Environmental, Optical Communications, Life Sciences and Display as well as the CPM integration.

Gross equity earnings of $76 million were down 37% year-over-year driven by the elimination of the equity earnings of SCP following the acquisition. Equity earnings were above our forecast driven by Dow Corning. Our effective tax rate was approximately 19% as expected. So, overall, EPS was $0.40, up 21% over a year ago and $0.03 above consensus.

During the quarter, we bought approximately $200 million of shares in the open market. We had $183 million remaining on our current program and expect to complete it in Q4. Now, I will go to the detailed segment results and I will begin with Display.

Display sales were $1.1 billion in Q3, a 62% increase versus last year, driven by the additional sales from our now consolidated operations in Korea, Corning Precision Materials. Q3 sequential price declines were less than Q2, as we had expected.

The LCD glass market up single-digits sequentially exceeded our expectations for the quarter driven by better than anticipated television sales and the supply chain’s preparations for retail sales for quarter four. The supply chain had likely anticipated some cooling off the television sales after the World Cup.

However, retail television unit sell-through in July and August was up in every region except Japan and Latin America. We anticipate Latin America be down given the very high set level of sales in Q2 for the World Cup. Japan remains sluggish, but less than 5% of the market.

All other regions were up and year-to-date through August we estimate TV unit retail sell-through is up 7%. Additionally, consumers are buying larger televisions, which adds to the volume of glass ships. I will give you our revised expectations for the higher growth of LCD glass market in our outlook section.

Supply chain inventory remained healthy exiting the quarter with forward-looking weeks of inventory down more than one week versus the end of Q2. We have always used panel prices to aid our analytics on the supply chain in Display market. Panel prices have risen over Q2 and Q3.

We do not believe the recent flattening of panel prices is caused for alarm because we do not see any unusual inventory buildup in the supply chain. Our volume in the third quarter was up high-single digits sequentially, volume growth slightly outpaced market growth as we continue to recover share at one customer in Korea.

Recall, in Q1 volume growth was softer than the market driven mainly by technical issue with our product at this account. We expect to continue – we continue to expect our full year volume growth to be in line with market growth and our worldwide share remains stable year-over-year.

Gross equity earnings from – on our equity venture in Korea SCG were immaterial. Year-over-year gross margins improved in Display driven by the CPM consolidation. Net income was up 14% year-over-year reflecting the impact of additional sales earnings and synergies from CPM.

Display organization has done an outstanding job this year with cost reduction and successfully integrating CPM. In Optical Communications, Q3 sales were $698 million, up 7% versus last year and better than we expected, driven by both enterprise and carrier sales in several regions.

All businesses and regions contributed to the year-over-year growth with the exception of fiber sales in China. Net income was up 8% versus last year, higher than sales as higher volume and manufacturing efficiency outpaced year-over-year price declines. On Environmental, Q3 sales were $282 million, up 25% versus last year.

Diesel sales were up 41% with new regulations in Europe as well as strong truck builds in North America driving additional heavy-duty sales. Light-duty diesel and auto sales were also up versus last year. Both the global light-duty and U.S. Class A truck markets are doing very well this year. Net income in Environmental was up 78% in the record quarter.

Strong volumes in auto and heavy-duty diesel as well as manufacturing efficiencies continue to push up Environmental’s profitability. Specialty Material sales for the quarter were up 10% sequentially, driven by Gorilla Glass shipments for new product launches.

Sales were consistent with Q3 of 2013 with price declines offsetting additional volume for Gorilla Glass. Net income in Q3 was up 18% sequentially on the higher Gorilla Glass volume, but down year-over-year by approximately 20%. The lower year-over-year sales price which had occurred in quarter one impacted the segment’s profitability.

In Life Sciences, sales and net income were relatively consistent year-over-year. Gross margin as a percentage of sales was up from volume and spending improvements. The low level of NIH spending has been affecting life science sales growth expectations for the year. Equity earnings from Dow Corning were $68 million, including earnings from Hemlock.

Earnings were up $40 million versus Q3 of ‘13. Hemlock added $10 million in higher volume improved manufacturing. Silicones business sales were up versus last year improving equity earnings by approximately $20 million.

Year-over-year equity earnings were also impacted by favorable tax expense, which was partially offset by the non-repeat of a favorable one-time item in 2013. Netting the tax expense versus this one-time added $10 million to equity earnings.

Now, turning to the balance sheet, we ended the third quarter with $6.1 billion in cash and short-term investments. We had very strong operating cash flow in the quarter. Strong operating cash flow also resulted in strong free cash flow quarter of more than $900 million. As a reminder, free cash flow is a non-GAAP measure.

You can find a reconciliation of GAAP on our website. We ended the quarter with approximately $1.2 billion of cash in the United States. Cap spending in the quarter was $262 million. We believe our total capital spending for 2014 will be approximately $1.15 billion with both CPM and staff groups tracking to lower spending.

Our preliminary capital spending forecast for 2015 is for $1.3 billion to $1.4 billion. Of course, we’ll update you on this in January. So, now, I will swing to outlook and I will start with Display. We are upgrading our expectations for the LCD retail and glass markets for the year.

We expect the retail market as measured in square feet of glass to be up 10% this year better than our prior forecast above mid to high single-digits, because of strong television markets. Year-to-date, more televisions have been sold at retail and with larger average screen sizes than our forecast.

Our preliminary look at 2015 also calls for growth in the television market. We expect the average screen size to increase 3% through 2015 driven primarily by increased affordability. Moreover, we believe screen size growth will be robust beyond 2015 driven by ultra-high definition television penetration, which favors larger size televisions.

We believe ultra-high def unit sales will double to approximately $25 million in 2015. Now, I know some investors are concerned about television sales given the current volatility in financial markets and some less than great economic indicators in Europe. This chart shows the history of the television market dating back to 1970.

As you can see historically, there is some correlation to TV demand reacting to recessions, but not always and not to a large degree. That helps us form a more optimistic picture about next year than some of our analysts. The yellow bars indicate recessions.

As you can see in some recession, the units continue to grow, example plus 2% during the first Gulf War period of time. In the financial crisis, units dropped to 1%. We expect LCD television unit growth to be up 4% on a continuous basis through 2018.

TV units have a history of growing and we expect this trend to continue with the potential for even higher growth rate given the faster replacement rate versus the CRT era. Now, next year is the year when more than half of all televisions in existence will be LCDs overtaking the CRT.

In quarter four, we expect the LCD glass market to be down slightly sequentially on a normal seasonality, although the volume is up year-over-year. Corning glass volume is expected to be flat to down slightly. We expect additional share recovery at the one account in Korea, where we experienced a technical issue earlier this year.

We expect LCD glass price declines in Q4 to further moderate the levels we experienced through most of 2013. Now, moving to Optical Communications, we expect Q4 sales to be up mid single-digits versus Q4 2013 driven by the continued strong sales of enterprise data solutions and fiber-to-the-home sales in North America.

We now expect full year sales to be greater than 10%, up due to growth in fiber-to-the-home, datacenters and wireless optical connectivity. Environmental sales, we expect Q4 sales to be up high single-digits year-over-year driven by the continued stronger heavy-duty diesel sales in the U.S. and from new regulations in Europe.

Environmental should achieve its $1 billion sales milestone this year. Now, turning to Specialty Materials, we expect sales to be down in the low to mid-teens versus the strong third quarter, which was driven by demand for new product launches. Gorilla volume will be up year-over-year in Q4 as it was in Q3.

Now, we are planning to launch our next generation of Gorilla Glass on November 20. I can’t spoil the launch, but it does promise to have dramatically improved performance characteristics and our customers are already integrating this glass into the new products.

Additionally, we expect our new glass to help us continue the trend of more moderate price impact we have seen the last two quarters. In Life Sciences, we expect sales to be consistent with last year. Life Sciences business has reacted to flat market by working on its cost to maintain profitability.

Now, continuing with the rest of our quarter four forecast, we expect quarter four equity earnings to be approximately $80 million to $90 million. This is up from Q3 driven by Dow Corning, where Hemlock Solar customers are purchasing more polysilicon to meet year end contractual obligations.

We expect our core equity earnings from Dow Corning to be approximately $80 million to $85 million in Q4. This is up year-over-year with higher sales at both Hemlock and silicones business. For the corporation, we expect gross margin to be about 46% driven by net positive factors in every business.

Display gross margin improved versus last year due to consolidation of CPM. SG&A and R&D spending should be approximately 14.5% and 8% of sales respectively. For modeling purposes note that SG&A is up from Q3 on normal seasonality. Now, we expect our other income, other expense line to be an income of $10 million to $20 million in quarter four.

This will include the final payment of an intellectual property settlement. Our effective tax rate for 2014 is expected to be approximately 19%. The projected rate is higher than 2013 driven by the addition of CPM’s income, which is taxed at the Korean tax rate of 24%.

Now, before I get to some additional financial items, I wanted to make a couple of comments on the innovation. Several programs are advancing nicely. Beyond Gorilla Glass 4 that I mentioned earlier, Corning was recently awarded BMW Supplier Innovation Award for lightweight automotive Gorilla Glass.

And our engagements with auto customers are accelerating. Additionally, we are making excellent progress on a major innovation project in Life Sciences. Our fully diluted share count for Q3 was $1.41 billion. Our current forecast for the average fully diluted share count for Q4 is approximately $1.4 billion.

Obviously depending on the stock price in our Q4, the purchasing activity in this number may vary slightly. Now, regarding the impact of yen in our earnings, we have shared the level of hedges we have put in place for 2015 to 2017 to offset the impact of the weakening yen. The yen has weakened significantly again during the quarter.

So, we are very pleased that we secured these translation hedges earlier until 2014. We currently report core performance at a constant yen. The rate is 93, which matches our hedged contracts which extend through 2014.

As we get closer to 2015, we will communicate our current thinking and strategy for core performance measures as they relate to constant yen reporting. Now, we have been very active on shareholder distributions over the past 2 years. As our investors know, our current repurchase authorization will be complete this year.

I am delighted that the Board of Directors has decided to accelerate the consideration of future repurchases and dividend increases. That concludes my opening remarks.

Ann?.

Thank you, Jim. We will now open the line for questions.

Greg?.

Thank you. (Operator Instructions) Your first question comes from the line of Rod Hall from JPMorgan. Please go ahead..

Good morning guys. Thanks for taking my question. I guess the first question I had for you was regarding Display demand. Jim, you gave a little bit of color in terms of regional spread on demand heading into Q4, but I am wondering if you could just give us some idea of what you are thinking on demand from various regions like the U.S.

economy seems like it’s in pretty decent shape and some of the UHD prices are dropping relatively quickly, but then we hear negative things coming out of Asia and Europe etcetera. So, I am just wondering if you could give us a little bit more color there.

And then I also wanted to see if you could talk to us a little bit about the Gorilla opportunity in auto, again you said you are progressing on engagements there, they are accelerating, at what point does that become material for Gorilla, do you feel it’s material now, can you give us any idea of when it might start to impact Gorilla growth? Thank you..

Well, I will comment briefly on the automotive and let Wendell chime in also. Breaking into the auto industry is going to be a slow and long-term process. We are very encouraged with the rate of engagement, has actually – have been increasing over the past couple of quarters.

This is not going to be significant to Gorilla next year in terms of the numbers, but we are delighted by the progress and the feedback that we are getting from car manufacturers.

Wendell, anything you would like to add?.

No, I think that’s accurate. The new material acceptance criteria in automotive are quite stringent, so the first piece you look for is adoption amongst early adopters who then prove it out all the way to the materials testing system, which now you have seen, hence the award for BMW and Innovation Award.

And then what happens next is car company after car company qualifies it a macro and then you turn into platform-by-platform. So it just takes a while in auto, but the good news is the surface area is really high too, so it’s worth being a little bit patient and working through the system..

And Rod talking about the regions for Television, as you mentioned, North America has been very strong and we are expecting that to continue both in unit and area growth.

Europe actually has been a pleasant surprise all year long and it wasn’t just the World Cup, but embedded in our expectations is it’s the lowest region for us in terms of television unit growth in the last quarter of the year, I guess Japan is equally low. And – but we are looking for North America, China and Latin America to be strong.

Latin America, we believe rebounds after the – and it was a little – couple of months where the television growth was much lower, actually negative after the World Cup, but that’s kind of our – how our balance goes..

Okay. And then Jim, I have just one more follow-up which is on the yen hedges, when do you expect to come back to us with a number there for 2015, is that an Investor Day timing for that or do you – would you tell us at the Q4 report.

And then just, when are you thinking about coming back to the market for that?.

We are going to come back at Q4 earnings. We won’t wait for the Investor Day..

Okay, great. Thank you, guys..

Your next question comes from the line of Patrick Newton from Stifel. Please go ahead..

Yes. Good morning, Wendell, Jim and Ann, thank you for taking my questions. I guess my first one is on Gorilla Glass, I think previously you talked about volume increasing 20% year-over-year, I am trying to understand if this prior outlook still stands, because it appears that your Specialty Material guidance implies flat total revenue year-over-year.

And then if there is a delta, is that completely pricing driven?.

We expect to be just about right on the 20% volume growth. As we did talk about at the beginning of the year, we did have a significant step-down in pricing. And then remember, there are things other than Gorilla in Specialty Materials. There is our semiconductor stepper lens business, which has a little bit of an impact on the numbers.

But fundamentally, we expect volume growth for Gorilla to be about 20%. And unfortunately the big step down in prices in Q1 shoot-up a large portion of that..

Okay.

And then I guess as a follow-up, just sticking with that theme, you made a comment that your next iteration of Gorilla is going to help pricing declines moderate, should we assume that this version has been prior – I am sorry, thinner than prior durations and should we see the pricing step down that you experienced in Q1 of ‘14 as kind of being a one-time event or is there a possibility that we could see another material step-down in pricing in 2015? Thank you..

So we are not expecting a material step-down in pricing in Gorilla for 2015.

Wendell, would you like to comment on the thickness and product?.

So GG4, when we roll it out, you will see a very dramatic improvement in its damage resistance.

And then the question will be will our customers choose to spend that dramatic improvement on improved drop performance for the same thickness or will they choose as they have every other time to go dramatically thinner and keep about the same drop performance.

We haven’t seen that be adjudicated at all the different customers that we have engaged with yet, so it’s still a little too early to call which direction they go. No matter what, it’s a step change above GG3 and widens the gap pretty significantly versus any competitive offering..

Great. Thank you for taking my question..

Your next question comes from the line of Amitabh Passi from UBS. Please go ahead..

Hi. Thank you. Good morning, guys.

Jim, just a quick question for you on LCD, I definitely see that volumes are trending ahead of expectations, but I think if I look at the last four years your ASP declines have been sort of in the mid-teens, sometimes even higher maybe with the exception of 2013, so just wanted to get your thoughts as we look to 2015 how should we be thinking of price declines, should we worry about another step function down in Q1, any sort of clarity on pricing or pricing trajectory would be very helpful?.

I would be happy to address the pricing commentary. Right now, we don’t see anything in the industry that would indicate that there should be a big step down in quarter one.

Things are going away with the combination of our customers’ profitability, panel prices, supply demand being in balance, as we have noted before our competition financial results are quite poor and we are three quarters now in the mission of price declines getting less each quarter.

So we are feeling quite good about the price up in quarter one and for 2015. Obviously, I can’t guarantee that, but I think we see the industry structure and the trends being favorable for pricing next year, and that’s obviously our – one of our key goals is to get price declines back and stay that back at a moderate level..

Okay.

Maybe just a quick follow-up for Wendell, on the telecom market, Wendell we have seen a lot of announcements now on gigabit deployments in the U.S., just curious from your perspective you are actually seeing the floodgates open, now you are starting to see investments follow through or is a lot of this just (rhetoric) at this point, so we would love to get your thoughts around the Fiber-to-the-Home market?.

So we are feeling it and feeling it very positively and it’s why we see our full year revenue to be up greater than 10% for us in Optical. Fiber-to-the-Home is a big part of that. Enterprise, specifically data centers are also part of that, as well as our Wireless business.

But what we are seeing is that the dialogue has shifted from whether or not to do Fiber-to-the-Home, to when are we going to end up doing Fiber-to-the-Home. And so that piece that you are picking up, we are beginning to actually see in network planning, and of course in this year we are seeing it in orders..

Thanks a lot. Thank you..

Your next question comes from the line of Joseph Wolf from Barclays. Please go ahead..

Thank you. On the TV commentary, the Display side I had a follow-up question. When you mention the pricing that you use and the growth, how – can you give us a little bit more insight on how you use that and does the pricing increase that you are talking about indicate some sort of large screen flattening out for a little while.

And then you mentioned a 3% growth, did you mean 3% point – points of, as a percentage of overall Display or a 3% growth in that category.

And then just any further commentary on timing of UHD?.

Well, ultra-high def is – we have been, I think generally slightly below what the industry has said although the numbers this year are slightly beating our expectations. I am not sure what you are referring to on the 3%. We have talked about the average size increasing 3% next year, which would be a little over an inch.

And as you know, we have actually twice this year had to raise our estimate of average size, but I think that’s the 3% you are referring to..

Yes, that’s exactly.

I wasn’t sure if you meant the percentage of that or a percentage of the total?.

No, for the average size going up by 3%..

And I think what’s smart about the combined piece of your question is that what we see is the introduction of ultra-high def also tends to push up screen size as well, because the experience is even better the bigger you go. And it also tends to be given the brand’s pricing strategies that their introductory plans tend to be on the larger TVs..

And then just an update, there was a lot of noise this quarter about the sapphire business.

As you introduced Gorilla 4 and you talked about the damage resistance, what are the key characteristics that you think your customers are looking for on the cover glass right now? And how is the – what do you think the market is saying right now with what happened with the sapphire story?.

Well, we have talked pretty extensively about sapphire. I mean, I think it is first important to put it in context. So, sapphire is not a new material. We have made a lot of sapphire. And we have made a lot of Gorilla. So, we can do either. We could be in either media and do just fine. We have chosen to invest more strongly in Gorilla.

The reason that even though sapphire is a legitimate choice as a cover glass, it’s not a new choice, it’s been out there for a while and there is under single-digit sort of millions of phones that use it. You have about 3 billion phones that use Gorilla. And the reason is this why customers care about is more than just scratch.

So, sapphire is superior from the scratch standpoint, but customers also care about battery life and Gorilla Glass transmits more light. So, therefore, it uses less battery power, but they don’t want their phone to break when they drop it and sapphire tends to be more brittle. So, Gorilla’s drop performance is better.

People care about value and Gorilla is about one-tenth the cost of sapphire. And people care about how heavy it is and Gorilla Glass is about 40% lighter than sapphire. And some people care about how green the product is and sapphire uses about 100 times more energy than glass to produce.

So as we put that whole balance together, we would rather invest the bulk of our innovation portfolio in covers into continuing to improve Gorilla Glass. We just think it’s a better technical bet, even though sapphire remains a valid choice and a material that we will continue to watch closely and continue to make decisions about..

Great. Thank you..

Your next question comes from the line of Ehud Gelblum from Citigroup. Please go ahead..

Hey. Good morning guys. Appreciate it. Thank you. Couple questions on Gorilla, couple questions on glass as usual.

Gorilla, 20% volume growth this year, Jim, what are you kind of expecting next year and what are the drivers of that? We have seen tablet growth kind of level out couple of your large customers sort of becoming light on tablets the last couple quarters.

Putting aside automotive, what do you – should we be looking at 20% growth again next year in volume and if so kind of what are the drivers there? And then pricing, I know we have never had a normal year for pricing for Gorilla, still you said that pricing took a step down in Q1 of this year, but assuming it doesn’t next year, what does normal pricing – we know what moderate to normal pricing looks like for LCD, we don’t quite know what it means for Gorilla.

So, this year it was 20% volume growth, 20% pricing declines, should we be looking at is normal pricing down 10% or so in Gorilla? And then if we look at glass for LCD, 10% growth this year in unit volume in 2014, nice strong number.

What should we be looking maybe on the screen size, but you are sort of thinking the same kind of 10% for 2015 and anything there? And then just want to confirm on pricing, you said it was moderating again. So, I am assuming around 4% or so.

I just wanted to quantify if 4% was the right decline for pricing for Q3? And why wouldn’t it have come straight back to 2% to 3%? What are the still kind of like minor deltas out there that are still keeping it not to this, in Q3 at least, not to the same levels as 2013? Thanks..

I think it’s a record for getting 10 questions in one minute..

I talk quickly..

So, we haven’t given official guidance yet on volume for Gorilla next year. We do expect Gorilla volume to grow, but I am not giving an official number next year. Obviously, we think phones will be up and the key question for us is the growth in tablets.

And so we want to see how well tablets finish up this year and then we will give you a volume estimate when we get to our quarter four call. On pricing, I think there is no way at this point in time to tell you what normality is in Gorilla. I mean, we do expect price declines every year. We expect excellent cost reduction.

It’s still a very new product and we are continuing to make progress there. What I have said is we are not expecting a repeat of the major down we had in Q1 of 2014. Now, turning to glass, we are – we haven’t given our official estimate for next year.

I don’t know if we will get quite to the 10% growth although we continue to be surprised by television both in units and size, but we are looking for the glass market to be up significantly again certainly upper single-digits is very possible. Whether it gets to 10% or not, I can’t tell at this stage.

Price declines were under 4% and to answer your question what gets it back to two, we haven’t seen two, absolute two for quite a while, but we think the trends in the industry are continuing to drive us to keep going down on the amount of this quarterly sequential price declines.

And that’s again the combination of things I mentioned earlier with the overall health of the supply chain and the health of our customers, our competitors’ weakening financials, so we believe we will continue to edge down a little bit every quarter. Obviously, we would be delighted as I am sure you would if it suddenly went to 2.0..

Okay, I appreciate it. Could I ask one more thing on core earnings? I was under the impression that you would have made your decision on what to do with core earnings this quarter, what gave you pause obviously, the yen has weakened again to 108.

Why didn’t you just go to 99 right now? What are you waiting for?.

We are very focused on finishing up the year and emphasizing the 93 that we have this year. We have been very, quite transparent about our hedges. The yen has had a lot of volatility in this most recent three months.

And so we decided it would have made the more sense to just finish out the year with the 93 emphasizing that and then make a final decision to potentially enter next year..

Okay. Thanks, Jim. Thanks a lot..

(Operator Instructions) Next, we will go to the line of Simona Jankowski from Goldman Sachs. Please go ahead..

Hi, thank you. I wanted to ask you first to follow up on Gorilla.

Can you just explain again why you expect it to decline in the fourth quarter that’s typically seasonally strong and you have some customers ramping new products? Is that an inventory effect or what do see there driving that decline?.

So, actually it’s the opposite. Quarter four volumes, with the exception of 2012, when most of that ended up in inventory actually do go down. I don’t think we are at a point of calling it that we have enough history to say it’s a seasonality thing. The volumes in Gorilla tend to be driven by product launches.

Customers build for that and we believe the down in quarter four is because of the large launch and large amount that we ship. That has happened in many quarter fours. That’s why people tend to think about it as normal seasonality, but it really relates to the impact of model launches and how fast people build them.

Sometimes they happen, the launches, on a more spread out period of time. This was a very concentrated one in the back part of quarter three..

Okay.

And then when you talked about not expecting a repeat of the big price down for Gorilla next year is what you saw the beginning of this year, can you just expand a little bit on what gives you that confidence? And putting it all together is it reasonable to expect that Gorilla revenues can grow next year?.

I won’t comment anymore on the pricing. You will have to wait till November 20, launch date of Gorilla 4, but I will say that it is I think reasonable that we have growth in Specialty Materials revenue netting the volume growth and the pricing..

Okay.

And then just one last one on FX, recognizing you won’t give us the precise guidance until next quarter, but I think you had commented in the past about a roughly 5% headwind from the FX change in terms of your hedge as we think about your earnings for next year, is that still the right way to think about it?.

Yes, in the absence of the yen suddenly going back into the lower 90s, we are pretty confident that our core rate will be moving up from 93. This has been I think known by investors in the market for quite a period of time. So with the yen currently at 108, we feel very good about the hedges we put in place..

Great. Thank you very much..

Your next question comes from the line of Steven Fox from Cross Research. Please go ahead..

Yes. Thanks. Good morning, guys. First of all, just on the upgrade to the retail glass demand, the 10%, just curious how much of that is sort of backward looking in other words just that Q3 came in better than expected and how much of that is just sort of intentions to buy in your model for the holiday season.

And then secondly, I was just curious around gross margins, seemed like you came in a little bit weaker than the 46% tag for the quarter, but you are still targeting 46% for this quarter, can you walk through some of the puts and takes with that Q3 and Q4? Thanks..

I don’t – on the gross margin I don’t think we came in weaker than our own expectations. So it may be weaker than what some analysts expected. On the 10%, it’s a combination of the robust demand we saw at retail and the World Cup didn’t seem to have a pull forward than a significant drop off. And second, it is related to the average size.

I think we told you in our July call that we moved our average size up. Generally, we do this only twice a year and actually we have raised our average size again and that’s based on historical experience that we have seen at retail in quarter three.

And we think looking forward, I haven’t – we hadn’t seen all the pricing for the holiday season yet, but it looks like the price on large televisions is going to be excellent for consumers and that plays into how we moved the average size up. So on the size it’s both historical as well as forward-looking based on price..

Great.

And then maybe I will just reword my gross margin question, it came in a little bit below what I was thinking, but maybe quarter-over-quarter for getting back to 46%, can you – I know you mentioned broadly speaking that all businesses would – you would see better margins, but can you walk through where maybe the more dramatic improvements in margins would be or anything we should keep in mind about gross margins specifically for Q4? Thanks..

I think one thing is that we expect our price declines in Display in Q4 to be less than they were in Q3. And the second thing is synergies from a CPM deal to accelerate. So those two things will help Display.

And then we are seeing excellent manufacturing performance in Environmental which coupled with the volume that we are seeing there is – I think it helps us quite a bit.

Wendell, anything you would like to add to gross margin?.

Well, I think as we just step back and take a look at the quarter we just went through, you see a lot of what our roadmap has been, what we hope continues to be which is you are seeing revenue up, you are seeing margin percent up year-over-year, you are seeing very balanced growth with Display providing a significant look as well as at Environmental and our other businesses.

Then we got a whole great set of new products that we are going to be rolling out here over the coming quarters. One, wireless is doing great, just put it Texas Aggie Stadium, so that’s going terrific. Gorilla Glass 4, you heard Jim talk about, gas particulate filters.

In Environmental, we are going to have a new high-performance display glass in the coming quarter. And then really a new life science product that we believe we should be rolling out over the coming three to four quarters that has a dramatic ability to create a big business for us.

And then cash flow is really strong and our balance sheet is a powerhouse. So if we can continue to follow this roadmap through the coming quarters, I think we are going to feel pretty good, Steve..

Great. That’s all very helpful. Thanks very much..

Your next question comes from the line of Brian White from Cantor Fitzgerald. Please go ahead..

Yes.

Jim, I am wondering when we think about Gorilla Glass volume, so you gave us Specialty Material sales, but Gorilla Glass volume, what kind have changed we see sequentially in the December quarter and also what are you seeing currently in the tablet market for Gorilla?.

So Gorilla Glass volume will get down and that’s the primary reason why we are talking about Specialty Materials sales going down sequentially. Gorilla Glass volume was up sequentially Q3 versus Q2 which obviously drove Specialty Materials up. Relative to the tablet market, we are shipping glass for new product launches.

And the key question in our mind is how well do they do at retail. Obviously, we are like everybody else, since we are not selling to the consumers directly, we rely on both our customers and trying to get retail data, but I can’t tell you that we are shipping increased amounts of tablet glass..

And I can see how different people get to different numbers in their Gorilla models. The reason is that Gorilla, our share is quite high especially among branded. And that you have a pretty complicated supply chain and it doesn’t take much of a change one way or another to impact that sequential number.

I think the key things to take away from Gorilla are that we are going to be up year-over-year. Our sequential is a little bit harder to call.

We think it will be down some sequentially primarily because the highest R-Squared we have see has been around major new product launches and we don’t see any major new ones happening in quarter four, some small ones but not some major new ones and that’s what’s really behind our guidance if that makes any sense..

Okay.

So volumes will fall maybe somewhere in single-digits, obviously you gave us the sales guidance for the Specialty Materials, is that reasonable?.

I think that the volume drop off is reasonably consistent with the Specialty Materials sales number in terms of a percent. It’s….

Okay.

And then when we think about the margin profile of Gorilla Glass, do you feel like margins this year will expand versus 2013 and how do we – is this a margin expansion story in Gorilla or have we kind of hit a wall and we are backtracking?.

Well, I don’t think we have hit a wall. Brian, I mean I think where we are at is its Gorilla Glass margins are better than the corporate average which we have got a nice corporate average as you would note, so it already starts out good.

I think where we need to see as we go forward will be just that interaction between the pricing and how does our cost structure look on GG4 and how well we do on utilization. So, I don’t think we have hit a wall.

I think we have ability to improve, but we still need to get a few more pieces of the puzzle in place to be able to give a definitive answer to you..

Great. Thanks..

Operator, we can have – take time for one more call..

Okay. That question comes from the line of Wamsi Mohan from Bank of America. Please go ahead..

Yes, thank you.

Jim, I was wondering if you could talk a little bit about how China Golden Week sales progressed relative to perhaps your expectations and what you think of the level of inventory of TVs across various regions or maybe you want to quantify it in terms of the glass inventory across the entire supply chain like you have done historically with the range of 14 to 20 weeks and I have a follow-up?.

So the holiday sales were just a hair weaker than our expectations. We often have quite lower expectations than the industry. But we – two things that we were happy about is one, it looks to us like the size of televisions sold during that were higher than we expected.

And very importantly, in fact we are just talking – when we are talking to our leader of the display business yesterday and they have completed their inventory checks post holiday period of time and feel that the inventory in China on television is just in very good shape.

So, just a slight unit miss versus our expectation, size better and inventories look okay..

Okay.

Could you quantify the level of glass inventory in weeks?.

In China, I cannot. I do not have that level of detail, Wamsi..

Sorry. Overall, Jim..

Overall, we fell into the ‘16. For this quarter, we have just closed, now remember, that’s a forward-looking statement and it always drives off quarter four is a big retail quarter. So, even though absolute inventories and supply chain went up, the weeks drop because of the look of the big pull-through of the holidays.

Our own estimate is we will finish quarter four with weeks in inventory just edging into the 17 level, which we think is very good for the supply chain and doesn’t signal any kind of problems..

Okay, great. And if I could ask one more, Jim, you said auto for Gorilla won’t be material in ‘15, but clearly you seem to be very excited about the long-term opportunity. Your CapEx guidance for 2015 does not look like it includes any new tanks.

So, when do you anticipate to invest for new tanks to support sort of much higher growth in Gorilla? And conceptually, how should we think about the margin profile for auto-related Gorilla Glass? Do you think that would be very different from the current margin profile of Gorilla? Thank you..

So, we are not planning to build any tanks for Gorilla for auto for a period of time. You remember one of the great benefits of CPM acquisition is that we got idle tanks. And as one of our large customers in Korea continues to move to thin, we are going to generate more capacity.

The margin profile will be different on this, because it will have extensive finishing and we haven’t decided how that finishing will be done, whether we do it or it’s done in conjunction with a partner, but you shouldn’t be looking at the gross margins to be the same on Gorilla in auto as what you have in consumer electronics.

Nevertheless, we expect it to be a profitable product and we are not having to put assets in front of the mill..

Yes, I think the right way to think, I will just echo one of Jim’s comments is the right way to think about Gorilla for us is that we are going to create the capacity through productivity to be able to service these markets both the ability to decrease thinness, to continue to improve that in display as well as improve it in Gorilla.

And so the risk profile we are looking for is to take market development risk without taking capital risk, because we are creating that capacity basically for free. And that’s the profile that we are looking for and those are the shots on goal that we are looking for, if that makes sense to you..

Yes. Thank you, Wendell..

Okay. Well, this wraps up our call. I have just a couple of closing comments. We have a few IR announcements. First of all, we will be appearing at the UBS Conference on November 18 and then again at the Barclays Conference on December 9. And both of those are in the San Francisco area. I’d like to summarize the highlights of the call.

We have achieved eight consecutive quarters of year-over-year EPS growth with nearly half of Q3’s improvement delivered by the non-display segments. Display has positive momentum. LCD glass price declines are moderating. The retail market is growing and there are good signs of a healthy industry. We think the integration to CPM is going very well.

We look forward to achieving $90 million or more in synergies this year. And very importantly for us, both Optical Communications and Environmental are having strong sales here with improved profitability. And we think we are on track to deliver sales and earnings growth for the fourth quarter.

And finally, as I have said in my prepared remarks and the press release, the Board will be accelerating their look on shareholder distributions in the fourth quarter.

Ann?.

Thank you, Jim and thank you all for joining us today. A playback of the call is available beginning at 11:00 AM Eastern today and will run until 5:00 PM Eastern on Tuesday, November 11. To listen, dial 800-475-6701, the access code is 338301. The audio cast of course is available on our website during that time. Greg, that concludes our call.

Please disconnect all lines..

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect..